Your SlideShare is downloading. ×
La financiación peer-to-peer como alternativa a los bancos
La financiación peer-to-peer como alternativa a los bancos
La financiación peer-to-peer como alternativa a los bancos
La financiación peer-to-peer como alternativa a los bancos
La financiación peer-to-peer como alternativa a los bancos
La financiación peer-to-peer como alternativa a los bancos
La financiación peer-to-peer como alternativa a los bancos
La financiación peer-to-peer como alternativa a los bancos
La financiación peer-to-peer como alternativa a los bancos
La financiación peer-to-peer como alternativa a los bancos
La financiación peer-to-peer como alternativa a los bancos
La financiación peer-to-peer como alternativa a los bancos
La financiación peer-to-peer como alternativa a los bancos
La financiación peer-to-peer como alternativa a los bancos
La financiación peer-to-peer como alternativa a los bancos
La financiación peer-to-peer como alternativa a los bancos
La financiación peer-to-peer como alternativa a los bancos
La financiación peer-to-peer como alternativa a los bancos
La financiación peer-to-peer como alternativa a los bancos
La financiación peer-to-peer como alternativa a los bancos
La financiación peer-to-peer como alternativa a los bancos
La financiación peer-to-peer como alternativa a los bancos
La financiación peer-to-peer como alternativa a los bancos
La financiación peer-to-peer como alternativa a los bancos
La financiación peer-to-peer como alternativa a los bancos
La financiación peer-to-peer como alternativa a los bancos
La financiación peer-to-peer como alternativa a los bancos
La financiación peer-to-peer como alternativa a los bancos
La financiación peer-to-peer como alternativa a los bancos
La financiación peer-to-peer como alternativa a los bancos
La financiación peer-to-peer como alternativa a los bancos
La financiación peer-to-peer como alternativa a los bancos
La financiación peer-to-peer como alternativa a los bancos
La financiación peer-to-peer como alternativa a los bancos
La financiación peer-to-peer como alternativa a los bancos
La financiación peer-to-peer como alternativa a los bancos
La financiación peer-to-peer como alternativa a los bancos
La financiación peer-to-peer como alternativa a los bancos
La financiación peer-to-peer como alternativa a los bancos
La financiación peer-to-peer como alternativa a los bancos
La financiación peer-to-peer como alternativa a los bancos
La financiación peer-to-peer como alternativa a los bancos
La financiación peer-to-peer como alternativa a los bancos
Upcoming SlideShare
Loading in...5
×

Thanks for flagging this SlideShare!

Oops! An error has occurred.

×
Saving this for later? Get the SlideShare app to save on your phone or tablet. Read anywhere, anytime – even offline.
Text the download link to your phone
Standard text messaging rates apply

La financiación peer-to-peer como alternativa a los bancos

714

Published on

En toda Europa ha descendido el número de créditos que los bancos ofrecen a las PYMES. En España, las denegaciones de crédito han aumentado en un 340% desde 2007 hasta 2010, mientras que en Gran …

En toda Europa ha descendido el número de créditos que los bancos ofrecen a las PYMES. En España, las denegaciones de crédito han aumentado en un 340% desde 2007 hasta 2010, mientras que en Gran Bretaña la cifra está en un 271%. Pero frente a este vacío en los últimos años han empezado a surgir alternativas que si bien están lejos del volumen de capital que maneja la banca, sí pueden ser una solución para las empresas de pequeño tamaño, especialmente en Gran Bretaña, donde el peer-to-peer lending tiene más recorrido.

La agencia de innovación británica Nesta ha publicado Banking on each other, un informe que analiza este fenómeno a partir de los datos de una de las plataformas online más importantes de peer-to-peer lending, Funding Circle, que hasta la fecha ha facilitado cerca de 100 millones de libras en créditos a unas 1.700 compañías. El estudio, descargable desde el portal de Nesta, destaca el potencial de innovación de este tipo de financiación.

El peer-to-peer lending consiste en inversiones individuales para ofrecer de manera colectiva créditos a pequeñas y medianas empresas. Esta fórmula reduce el papel de los intermediarios, sustituyendo los bancos por una plataforma online de conexión entre inversores y solicitantes de crédito donde son las personas quienes establecen el porcentaje de interés en función de un estudio de riesgos realizado por la propia plataforma. En España, aunque el modelo está mucho menos extendido, existen algunos espacios como Comunitae que empiezan a abrir camino.

A diferencia de otras fórmulas de financiación colectiva como el crowdfunding, quienes participan en el peer-to-peer lending lo hacen casi exclusivamente por motivos económicos, esperando obtener un beneficio de la inversión. Aún así, tal y como se recoge en el estudio publicado por Nesta, este tipo de financiación está abriendo el acceso a crédito con opciones más rápidas y rentables tanto para las compañías como para los inversores individuales.

Published in: Business, Economy & Finance
0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total Views
714
On Slideshare
0
From Embeds
0
Number of Embeds
1
Actions
Shares
0
Downloads
14
Comments
0
Likes
0
Embeds 0
No embeds

Report content
Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
No notes for slide

Transcript

  • 1. 1 BANKING ON EACH OTHER: Peer–to–peer lending to business: Evidence from Funding CircleYannis Pierrakis and Liam CollinsApril 2013BANKING ONEACH OTHERPeer–to–peer lending to business:Evidence from Funding Circle
  • 2. 2 BANKING ON EACH OTHER: Peer–to–peer lending to business: Evidence from Funding CircleAbout NestaNesta is the UK’s innovation foundation. An independent charity, wehelp people and organisations bring great ideas to life. We do this byproviding investments and grants and mobilising research, networksand skills.Nesta Operating Company is a registered charity in England and Wales with company number7706036 and charity number 1144091. Registered as a charity in Scotland number SC042833.Registered office: 1 Plough Place, London, EC4A 1DEwww.nesta.org.uk © Nesta 2013.
  • 3. 3 BANKING ON EACH OTHER: Peer–to–peer lending to business: Evidence from Funding CircleExecutive summaryAs banks retrench in the wake of the financial crisis, small businesses have found itincreasingly hard to access the finance they need to grow. But there is some cause foroptimism. New providers of business finance are stepping into the space left by banks,and are devising innovative business models, often taking advantage of new technologiesand different sources of capital. One such model that has grown rapidly in recent years ispeer–to–peer financing.This report seeks to cast some light on the emerging field of peer–to–peer lending tobusinesses, using a large set of data collected through Funding Circle, the largest peer–to–peer business lending site in the UK. Funding Circle has facilitated approximately £100million in loans to over 1,700 companies to date (as of April 2013).This report looks at the characteristics of both Funding Circle’s borrowers and lenders,which enables the examination of the decision to seek or lend money through the peer–to–peer sites or ‘platforms’. It is the first attempt to analyse the peer–to–peer lending tobusinesses model using proprietary data from Funding Circle. Using survey data from 630investors and 89 companies the research identified that:Lenders and their activity• A typical lender is male, highly educated and relatively wealthy with a science, businessor finance degree. He has around £80,000 in savings and investments and belongs tothe top 20 per cent in terms of net financial wealth.• The average lender has lent a total of £8,000 across loans to 67 companies, throughFunding Circle. The average amount that individuals have lent to each company is £157and the median £50. Funding Circle data suggests many lenders build strong portfoliosof companies by lending to at least 100 companies.• The expectation of making a financial return is the main motivation behind individuals’decision to lend money to companies while the interest offered, risk rating and thefinancial track record of the company were deemed the most important factors inlender’s decisions. In contrast the market potential of the company is not of greatimportance to half of the survey respondents.• Seventy–five per cent of lenders surveyed expect to increase the amount they lendthrough Funding Circle in the coming year. Should the model continue to gain tractionwith potential lenders, up to £12.3 billion worth of business lending could be facilitatedthrough the peer–to–peer model per annum.The businesses borrowing• The average size of the loan raised by the surveyed companies is £35,000 (£50,000 forall companies that raised finance through Funding Circle) and the average number ofpeople that lent money to each company is 418.• The average interest rate of the loans provided to the sampled companies was 8.02 percent.1This is slightly lower than the interest rate for all businesses on Funding Circle(which currently stands at 8.7 per cent). Sixty per cent of the companies in the sampleattempted to secure a bank loan before approaching Funding Circle. Seventy–sevenper cent of the surveyed companies are likely or very likely to approach Funding Circle
  • 4. 4 BANKING ON EACH OTHER: Peer–to–peer lending to business: Evidence from Funding Circlefirst in the future, if further external finance is needed. Even if banks offer a borrowingfacility similar to Funding Circle in the future, only 27 per cent of the surveyedcompanies would approach banks first.• Funding Circle’s speed and that it is not a bank seem to be the most important benefitsfor companies seeking external finance through the Funding Circle.• Thirty–two per cent of surveyed companies responded that without Funding Circle, it islikely or very likely that they wouldn’t have received external finance.
  • 5. 5 BANKING ON EACH OTHER: Peer–to–peer lending to business: Evidence from Funding CircleCONTENTS1 Introduction 71.1 The financial crisis and business lending 71.2 The rise of the finance platforms: Crowdfunding and peer-to-peer lending 101.2.1 Crowdfunding 101.2.2 Peer-to-peer lending 111.2.3 Technology and the growth in online finance 122 Peer-to-peer lenders 142.1 Lenders tend to be wealthy, well-educated and from the South East 142.2 Lenders achieve high levels of diversification and many use the Autobid tool 182.3 Lenders expect to lend more in the future 202.4 Interest rate and risk rating most important factors for lenders 223 Borrowers tend to be established businesses, exporters and seeking finance for working capital or expansion 253.1 Borrowers receive funds from a large number of lenders 283.2 Borrowers valued the speed at which funding was delivered and do not plan to return to banks for funding in the future 334 Conclusion 385 Appendix 395.1 Methodology 395.2 Examining the drivers of the amount lent by individuals 396 Endnotes 42BANKING ONEACH OTHERPeer–to–peer lending to business:Evidence from Funding Circle
  • 6. 6 BANKING ON EACH OTHER: Peer–to–peer lending to business: Evidence from Funding CircleFiguresFigure 1: Trends in lending to UK businesses 7Figure 2: Concentration of SME lending market in the UK 9Figure 3: Geographical location of borrowers 14Figure 4: Lenders’ highest level of qualification 15Figure 5: Lenders’ field of qualification 15Figure 6: Personal characteristics of lenders 16Figure 7: Investment practices 18Figure 8: Secondary market activity 19Figure 9: Predictions of future lending activity 20Figure 10: How important are the following factors in your decision to lend money on Funding Circle? 22Figure 11: How important are the following factors in your decision to lend money to a particular company? 23Figure 12: Businesses’ export activity 26Figure 13: The main reason(s) for raising external capital 26Figure 14: Companies’ regional distribution 27Figure 15: Average amount of loans raised 28Figure 16: Number of lenders to each company 29Figure 17: Companies’ risk rating 30Figure 18: Number of loans by risk rating 30Figure 19: Loan repayment and failure rate 31Figure 20: Reasons for the bank application not being completed 33Figure 21: Reasons for not attempting to secure a loan from a bank 34Figure 22: Benefits and drawbacks of borrowing through Funding Circle 35Figure 23: What were the results of securing finance for your business? 36Figure 24: Future borrowing behaviour 37TablesTable 1: Unsuccessful loan applications by SMEs (as a total of total loan applications) 8Table 2: A typology of crowdfunding models 11Table 3: P2P lenders and business angel investors 17Table 4: Characteristics of the companies 25Table 5: Business loan characteristics 28Table 6: Bad debt by risk rating 32Table 7: Companies’ borrowing activity 32Table 8: Investment practices analysis 40
  • 7. 7 BANKING ON EACH OTHER: Peer–to–peer lending to business: Evidence from Funding Circle1 Introduction1.1 The financial crisis and business lendingThe 2008 financial crisis and ensuing recession brought into stark focus the frailty of thefinancial system in the UK, and in particular its reliance on a few large banks that became‘too big to fail’. The negative impact of the crisis was felt throughout the economy andespecially by small businesses seeking finance from the banking sector. As a result, lendingto small and medium–sized enterprises has fallen dramatically since the beginning of thefinancial crisis.Figure 1: Trends in lending to UK businessesSource: Bank of England – Trends in Lending, April 2012While lower demand for finance by businesses has contributed to some extent to this fall,many businesses and commentators pin much of the blame on the ability and willingnessof the banking sector to lend. The impact of the crisis has been felt by businesses ofall sizes, but SMEs were left particularly vulnerable as their size prevented them fromaccessing alternative sources of finance such as bond markets. The Breedon review onboosting finance options for business, estimates that the finance gap for all businessescould be from £84 billion to £191 billion over the next five years.2201525301050-5-10-15Percentage changeson a year earlierPNFCs (Private Non–financial Corporations) All SMEs Small businesses200420052006200720082009201020112012
  • 8. 8 BANKING ON EACH OTHER: Peer–to–peer lending to business: Evidence from Funding CircleThis contraction in loan provision has been caused bothby the current pressures on incumbent lenders butalso by issues related to the structure of the financialsystem highlighted in the aftermath of the crisis. On theformer, regulation, both domestic and international, hasled to banks restricting their flow of lending. Capitaladequacy rules have tightened considerably includinghigher capital ratios and new specific rules on riskweightings on SME loans and overdrafts.5Rejectionrates from banks have also consequently undergone asignificant increase. As seen in Table 1, the proportion ofunsuccessful loan applications by SMEs has dramaticallyincreased between 2007 and 2010 in all Europeancountries, with the exception of Sweden and Germany.In the UK, there has been a 271 per cent increase in theunsuccessful loan applications between 2007 and 2010.Table 1: Unsuccessful loan applications by SMEs (as a percentage of total loan applications)Concerns regarding the concentration in the market for SME loans provision have alsoarisen in the wake of the crash. SME lending is particularly concentrated with just fiveproviders supplying over 90 per cent of the lending. The dominance of these suppliers inthe market and the lack of alternatives was highlighted by the public bailouts some banksrequired to keep them solvent.The UK government has taken a variety of steps to address the issue of restricted lending,including Project Merlin, an agreement between government and the banks which led to£190 billion of new loans from four of the major banks to businesses in 2011.6In addition,the National Loan Guarantee Scheme was established with the aim to deliver more than£20 billion in lending to SMEs from the banks.7In August last year, the Governmentannounced the Funding for Lending scheme which aimed to ensure £80 billion of lendingwas completed to UK households and businesses.as little as bank lendingis involved today in SMEfinancing. It is going tocontinue to shrink, veryfast, over the next six toeight years.”Xavier Rolet, CEO, LondonStock Exchange3British lenders arestruggling to bolstercapital to asset ratios;one way to do this is bycutting assets, includingloans”.The Economist 12 Jan 20134‘‘‘‘ 2007 2010 Difference (%)Ireland 1 26.6 +2560%Greece 0.7 10.8 +1443%Denmark 3.7 18.5 +400%Spain 3 13.2 +340%Italy 1.2 4.9 +308%UK 5.6 20.8 +271%France 2 7 +250%Netherlands 6.8 22.5 +231%Germany 6.7 8.2 +22%Sweden 8.7 6.1 –30%Source: Eurostat, authors’ calculations
  • 9. 9 BANKING ON EACH OTHER: Peer–to–peer lending to business: Evidence from Funding CircleFigure 2: Concentration of SME lending market in the UKSource: Research Now, Mintel, 2011While the majority of these measures are aimed at facilitating increased lending byincumbent lenders, efforts are also being made to increase diversity in the lending market.The Business Bank8aims to use £1 billion of Government money to supply £10 billion inloans to businesses and the Business Finance Partnership9will co–invest £1.2 billion intonew sources of finance, primarily managed funds that will lend to businesses.Of the £1.2 billion supplied by the Business Finance Partnership, £100 million was setaside to support more disruptive models of finance provision. These models includeonline marketplaces, supply chain finance and mezzanine finance. One of the businessesto receive this money, £20 million from the pool, is the online peer–to–peer marketplaceFunding Circle, which allows individuals to lend small amounts to businesses through itsonline platform.10The model is part of a growing number of online marketplaces facilitatingthe direct funding of large projects by individuals through aggregating small amounts.This type of investing is usually referred to by one of two terms that emerged in parallel,‘crowdfunding’ or ‘peer–to–peer finance’.Box 1: About Funding CircleFunding Circle was founded in August 2010 and and was the first company in the worldto allow individuals to lend to companies. To date it has facilitated the provision ofapproximately £100 million in loans to UK businesses. Businesses with a minimum of£100,000 turnover and two or more years of accounts filed with Companies House, canapproach Funding Circle for the opportunity to borrow between £5,000 and £1 millionfrom its crowd of members. Currently there are more than 40,000 people registeredand Funding Circle is facilitating £10 million of lending every month.Once a loan application meets Funding Circle’s criteria, it is reviewed by Funding Circle’sCredit Assessment team. Businesses that pass this stage are assigned a risk rating based91%of the SMEbanking marketis dominated bythe big five banks29%20%17%13%12%
  • 10. 10 BANKING ON EACH OTHER: Peer–to–peer lending to business: Evidence from Funding Circleon Funding Circle’s risk model that uses information from a number of sources includingcredit–rating agency Experian and is posted onto the site. Each loan request has its owndedicated page where potential lenders can see the financial details of the business andwhy they are seeking finance.Lenders can then bid for small pieces or ‘loan parts’ of the overall amount being sought,indicating how much they would like to lend and what interest rate they would like toreceive. The borrower can choose to accept the loan once the target is reached or leaveit live for a maximum of seven or 14 days – depending on the size of the loan; the benefitof the latter being that the more time it is online, the more likely those parts of the loanwith a high interest rate will be undercut by other lenders.All loans, require security in the form of personal guarantees and larger loans requireasset or property security (non–residential). Funding Circle charge fees to businessesranging from 2–4 per cent depending on the loan amount. They also offer an asset–purchase option for a 5 per cent fee, using said asset as a guarantee. Lenders arecharged an annual servicing fee of 1 per cent.Funding Circle also enables loan parts to be sold between lenders to provide liquidity.On average loan parts take about two days to be sold. Participants can sell loan partseither for a premium or at a discount and are charged a fee of 0.25 per cent.1.2 The rise of the finance platforms: Crowdfunding and peer–to–peer lending1.2.1 CrowdfundingOnline crowdfunding,11a relatively new form of financing for projects, people andbusinesses has recently received considerable attention. The model, which allows manypeople to contribute small amounts in the hope of achieving a combined total that meetsor surpasses a predetermined funding target, has its roots in the creative industries whereit was successfully pioneered in the financing of albums and concerts. Crowdfunding sitesor ‘platforms’ sprung up that facilitated the sourcing of capital from large numbers ofpeople for one–off projects. From its beginning funding music, the model expanded intothe creative industries more broadly and into product design and development helped bythe growth of large platforms such as Kickstarter and Indiegogo. In recent years, the modelhas been adapted further to fund projects with a specifically social aim and also into thefinancing of businesses. Previous Nesta reports12provide detailed descriptions of the basicprinciples and characteristics of crowdfunding as well as the many areas it operates in.They also describe a number of distinct models under the umbrella term of crowdfundingsuch as: donation crowdfunding, crowdfunded equity investing and crowdfunded lending.One important distinction between these models is the motives of the people that providefunding. As Table 2 illustrates, this varies from the donation model where the aim is purelyphilanthropic to some who fund through the lending model who do so solely to attain afinancial return.
  • 11. 11 BANKING ON EACH OTHER: Peer–to–peer lending to business: Evidence from Funding CircleTable 2: A typology of crowdfunding models1.2.2 Peer–to–peer lendingWhile similar to crowdfunding, peer–to–peer lending is very distinct. The term peer–to–peerlending has its origins in the facilitation of unsecured personal lending between individuals(i.e. loans are made to an individual rather than a company and borrowers do not providecollateral as a protection to the lender against default)13via online sites such as Zopa,14Lending Club15and Prosper.16There has been explosive growth in peer–to–peer personallending across the world in the last decade, driven by the many–to–many communicationparadigm, and various reports have looked at several aspects of this model such as theborrowers and lenders characteristics, motivations and strategies.17A relatively new application of the peer–to–peer lending model allows the crowd (individuallenders) to lend money to companies (instead of individuals) seeking debt finance. Theplatform facilitating the funding serves as an intermediary between the individual lenderand the company seeking a loan. In most cases, the loan is an agreement between theborrower and the lender and not with the intermediary. Form of Form of return Motivation of funder contributionDonation Donation Intangible benefits. Intrinsic and social Crowdfunding motivation.Reward Donation Rewards but also Combination of intrinsicCrowdfunding Pre–purchase intangible benefits. and social motivation and desire for reward.Peer–to–peer Loan Repayment of loan with Primarily financiallylending interest. motivated.Equity Investment Return on investment Combination of intrinsic,Crowdfunding in time if the business social and financial does well. Rewards also motivation. offered sometimes. Intangible benefits another factor for many investors.Box 2: Other peer–to–peer business lending providersFunding Circle is the largest but not the only player in the market for peer–to–peerbusiness lending in the UK.ThinCats operates as an investment club for experienced investors seeking to lenddirectly to UK businesses. Launched in 2011, it uses a similar auction model to decide oninterest rates and has achieved an average interest rate of over 10 per cent for lenders.Lenders, who are required to lend a minimum of £1,000 per loan, are not charged anyfees with businesses charged 1.5 per cent of the loan amount. To date ThinCats has lentaround £20 million across 110 loans.Another recipient of money from the Business Finance Partnership scheme is peer–to–peer lender Zopa. Zopa, who up to now have been focusing on personal lending were
  • 12. 12 BANKING ON EACH OTHER: Peer–to–peer lending to business: Evidence from Funding Circlethe first peer–to–peer lender in the UK established in 2005. To date they have facilitatedin over £270 million in lending and looking forward will be directing more of this towardssole trader loans up to £15,000.1.2.3 Technology and the growth in online financeAccording to Crowdsourcing.org, in 2012, $2.7 billion was raised from the crowd(crowdfunding and peer–to–peer lending), mostly in the US, to finance over a millionprojects, ranging from start–ups18to community projects,19and from games20to scientificresearch.21Peer–to–peer finance has been no exception with sites like Zopa, Prosper andFunding Circle growing rapidly in recent years. While the recent global recession hasplayed a part, advancements in technology are a significant driver of the recent growth ofthis type of model.The proliferation of internet use and growth in social media has enabled those seekingfinance to reach more people with greater ease and at far less cost. The ability tosecurely transfer money online allows those seeking to back a project or business tosafely contribute funds. And the increase in the quality and volume of data available onindividuals and businesses finances allow for the creation of accurate credit scores, whichallow lenders to set suitable interest rates on the finance they offer. All of these have beencatalysts for the recent growth of innovative forms of finance such as peer–to–peer.The peer–to–peer business lending model is largely undiscovered by academics. There issome emerging literature on peer–to–peer lending between individuals but lending frompeople to businesses has received considerably less attention. Therefore, this report is anexplanatory and descriptive analysis which investigates questions related to the personaland behavioural characteristics of individuals and companies and aims to bring to lightinsights on this recent phenomenon.The contribution of this research is twofold. First, it investigates the peer–to–peer lendingmodel and provides insights on participant and investment characteristics. Second, itexamines the motivation behind the decisions made by both lenders and borrowers. As aresult, for the first time we are able to understand what type of people and companies usepeer–to–peer lending platforms and the main reasons behind their decisions to use them.More specifically, the research aims to:• Examine the origins of peer–to–peer lending and how the model operates.• Profile those who lend and borrow through the model.• Examine the motivations behind individuals and businesses participation in peer–to–peer finance.• Explore the potential for further growth in peer–to–peer lending to businesses in the UK.
  • 13. 13 BANKING ON EACH OTHER: Peer–to–peer lending to business: Evidence from Funding CircleThe Study SampleThe data collected for this study included responses to a survey from 630 differentlenders who lent £4,143,000 through 34,700 individual loans (transactions), and from89 individual companies, all of whom are members of the Funding Circle platform thatcollectively borrowed £2 million from lenders TotalNumber of lenders 630Total amount lent by these lenders £4.1mNumber of individual loans made by these lenders 34,700Number of companies 89Total amount raised by these companies £2m
  • 14. 14 BANKING ON EACH OTHER: Peer–to–peer lending to business: Evidence from Funding Circle2 Peer–to–peer lenders2.1 Lenders tend to be wealthy, well–educated and from the South EastThere was considerable variation in the wealth, education and experience of those lendersthat responded to the survey. Their approach to lending through the model also varied withrespect to the amounts lent and the businesses they lent to. Below are some of the keyfindings from the lenders survey.Raising funding through crowd models has the potential to mitigate many of the distanceeffects found in traditional fundraising efforts (Agrawal et al., 2010).22In the case of peer–to–peer business lending, the majority of the peer–to–peer lenders are located in Londonand South East England (Figure 3).Figure 3: Geographical location of lendersNorthWestEnglandNorthernIrelandScotlandSouthWestEnglandWalesWestMidlandsYorkshireand theHumberEastMidlandsEast ofEnglandLondonSouth EastEnglandNorthEastEnglandless than 10%Percentage of sample10 - 20%more than 20%
  • 15. 15 BANKING ON EACH OTHER: Peer–to–peer lending to business: Evidence from Funding CircleTwenty–two per cent of the surveyed lenders live in London and a similar proportion livesin the South East; 12.5 per cent of the lenders live in South West England.Figure 4: Lenders’ highest level of qualificationSix per cent of the lenders surveyed have a PhD and 5 per cent have an MBA degree(Figure 4). One quarter of lenders have another form of postgraduate qualification andaround the same proportion hold a professional qualification. Looking at the field ofqualification, engineering, accountancy, business and IT were the most common responses(Figure 5).Figure 5: Lenders’ field of qualification*A number of borrowers have very specific qualifications could not be assigned to any of the fields aboveMBAOtherPhDPost GraduateProfessional QualificationSecondaryUndergraduate5%3%6%25%23%14%24%BusinessITAccountancyEngineeringComputer ScienceEducationMathematicsEconomicsFinanceElectronicsManagementLawBiologyPhysicsHistoryScienceEnvironmental ManagementChemistryNumber of people60200 10 4030 50
  • 16. 16 BANKING ON EACH OTHER: Peer–to–peer lending to business: Evidence from Funding CircleFigure 6: Personal characteristics of lendersFigure 6 shows that the average lender is around 50 years old and male (83 per cent of alllenders that took part in the survey were males). Forty-eight per cent have more than tenyears’ experience working with large corporates and 38 per cent have more than ten years’experience working with SMEs.Half of them have not founded any new business, however, several lenders had foundedmore than one company. Thirty per cent of them have experience in accessing externalcapital for businesses and 9 per cent of them identified themselves as business angelinvestors. Also, around 90 per cent of the surveyed lenders have invested money in bondsand shares.151050Age of respondentsBusiness experience of lendersPercentage ofrespondentsGender of lendersMale Female806020 4017%83%Percentage of lenders withmore than 10 years experienceworking within large companiesPercentage of lenderswith more than 10 years ofexperience working with SMEsPercentage of lenders withinvestments such as bonds,shares etc.Percentage of lendersthat are business angelPercentage of lender withexperience in accessing capital10040 60 800 2048.2%38.1%88%9%30%
  • 17. 17 BANKING ON EACH OTHER: Peer–to–peer lending to business: Evidence from Funding CircleIn general, it appears that peer–to–peer business lenders are sophisticated individuals,highly–educated with investments in other assets. Unfortunately, there is no data currentlyavailable on the characteristics of participants in crowdfunding and therefore an empiricalcomparison between peer–to–peer business lenders and crowdfunding contributors isnot possible. However, anecdotal evidence suggests that crowdfunders (those donating orseeking a non–financial return from their contributions) are from more varied backgroundsand unlikely to have as much financial or investment experience. In contrast, peer–to–peerlenders seem to share several personal characteristics with business angels (Table 3).Table 3: P2P lenders and business angel investors P2P Lenders Business Angels Median Mean Median MeanAge 51 50 53 52Percentage Male 85 93 Years with large 11 to 15 13 15companyVentures founded 0 1 2.5 3.4Number of companies 35 67 6 9lent to/invested inPercentage of their wealth 3 9 10 11invested directly Amount of money invested £2,000 £7,983 £220,000 £1,312,200in total by each investorInvestment size £50 £157 £25,000 £42,000(per investment)Source: Data for BAs come from Siding with the Angels report23
  • 18. 18 BANKING ON EACH OTHER: Peer–to–peer lending to business: Evidence from Funding Circle2.2 Lenders achieve high levels of diversification and many use the Autobid toolFigure 7 summarises investment characteristics. Survey responders were asked questionsrelated to their investment strategies such as number and size of loans made throughFunding Circle.Figure 7: Investment practicesPercentage of lenders that use autobid functionProportionoflendersYes No45%55%Amount lent in total through FC(£)Amount of money lent by individual lenders45%40%35%30%25%20%15%10%5%0%>30012001-3000<1000 1001-200042%10%6%41%FinancialwealthPercentage of lendersPercentage of financial wealth lent through FC>30%10.1%-30%5.1%-10%2%-5%<2%0% 10% 20% 30% 40% 50% 60% 70%
  • 19. 19 BANKING ON EACH OTHER: Peer–to–peer lending to business: Evidence from Funding CircleThe data shows that the respondents of the survey (only those that have made one ormore investments) have lent on average £7,983 across loans to 67 companies. However,there is large heterogeneity between individual lenders which is evident from the medianvalues. The median amount of money that individuals lent was £2,000 over loans to amedian of 35 companies.Funding Circle also provides an Autobid24option for lenders. The lender sets the averageinterest rate they require, the level of diversification they want and the risk bands the loansthey are willing to fund must be in. The Autobid tool then bids on loan parts that meetthese criteria and add successful bids to the lenders portfolio. The benefit of this is thatthose looking to lend to a large number of businesses can do so without having to gothrough them one–by–one. Lenders in the sample made on average 35% of their loans viaAutobid, however, there are several lenders (23.6 per cent of the sample) that lend all theirmoney via Autobid (approximately 50 per cent according to Funding Circle’s data). Thelarge proportion of loans made with Autobid underlines the disconnect between lendingand engagement with the company and that lenders do not need to have significantinvestment expertise.The total amount of capital that individuals have on average invested through FundingCircle as a proportion of their total financial wealth (savings and investment) is 9 percent (similar to business angels who tend to invest around 10 per cent of their wealth intoventures).25The total amount of savings and investment of the average lender is £340,000(and the median £80,000). Twenty–one per cent of lenders have lent money to one ormore companies outside Funding Circle (to an average of 7.8 companies and a median oftwo). The average amount of money they have lent to these companies is £27,750 while themedian is £10,000.Figure 8: Secondary market activityAlmost half of the lenders have bought loan parts on the secondary market while almostone in five has sold loans through it (Figure 8). The secondary market provides liquidityand it is an important aspect of the peer–to–peer lending which allows lenders to accesstheir capital and any interest they have made before the end of the terms of the loan.YesHave you bought loans onthe secondary market?Have you sold loans onthe secondary market?No54% 81%19%46%
  • 20. 20 BANKING ON EACH OTHER: Peer–to–peer lending to business: Evidence from Funding CircleThe average time that a lender spends doing research on an individual business beforebidding is 15 minutes. This illustrates that peer–to–peer lending is very different frombusiness angel investing where potential investors dedicate significant time for duediligence and research before they decide to invest (a typical business angel spends 20hours on due diligence before investing in a company).26Only one–quarter of the surveyedlenders have used the Q&A facility, again confirming that most lenders rely instead on therisk rating assigned to individual loans by Funding Circle.2.3 Lenders expect to lend more in the futurEFigure 9: Predictions of future lending activityFigure 9 shows that 75 per cent of surveyed lenders expect that they will increase theirlending through Funding Circle in the coming year. Peer–to–peer business lending isstill in its infancy but has in recent years displayed the potential to become a valuablesource of finance for UK SMEs. To give some indication of the potential size of this marketin the future, the predictions current users made have been combined with financialwealth statistics from the ONS in order to extrapolate what would happen if more peopleparticipated in peer–to–peer lending.Funding Circle lenders were asked what percentage range (e.g. 5–10 per cent) of theirsavings and investments they envisaged lending through Funding Circle in the future.Taking the average of the lower values in these ranges (e.g. the 5 from the above example)gives a figure of just over 13 per cent.160140120100806040200NumberofrespondentsYes No75%25%Lessthan5%5%-10%10%-15%15%-20%20%-30%30%-40%40%-50%50%-75%75%+Do you expect to increase theamount you lend through FundingCircle in the coming yearLooking ahead, what percentage of your portfoliocould be made up of your Funding Circle investments?
  • 21. 21 BANKING ON EACH OTHER: Peer–to–peer lending to business: Evidence from Funding CircleAs previously shown, the majority of participants on Funding Circle come from a wealthysubsection of population with the typical (median) respondent reporting total savingsand investments of £80,000. Given the willingness of this section of the population toengage with the model, there is scope for more lenders of similar wealth to divert someof their financial wealth towards SMEs. The ONS wealth and assets survey 2008–2010estimates that the median net financial wealth of the richest 10 per cent of the populationis £123,200. If just 50 per cent of these were to lend 13 per cent of their financial wealth27through peer–to–peer platforms, it could facilitate £37 billion in SME lending. Given anaverage loan maturity of three years this would provide £12.3 billion in lending28to UKbusinesses per annum. However, it is worth noting that given the amortising nature of loansthe overall net amount of lending would be higher.The domination of the current user base by quite wealthy lenders is probably due tothe newness of the model and those without a lot of financial experience lacking theconfidence to participate. However, as this market grows and starts demonstrating returnsover a longer period of time the wider public will become more likely to lend through it.There is also the potential for institutional investors such as pension funds or endowmentsto invest capital though peer–to–peer lending. Expanding into these new sources of financewill significantly increase the amount of money that could be lent to businesses throughthe model.If just 50 per cent of this10 percent were to lend 13 per centof their financial wealth throughFunding Circle this would amountto £37bn in lendingThe median investor onFunding Circle has afinancial wealth of £8O,000.Ten per cent of the UKpopulation have a financialwealth well exceedingthis amount.Current lenders onFunding Circlepredict that at least13 per cent of their financialwealth could be lent tobusiness in the futurethrough P2P.£12.3bnin lendingper annumWith an average loanmaturity of approximately threeyears this could deliver...
  • 22. 22 BANKING ON EACH OTHER: Peer–to–peer lending to business: Evidence from Funding Circle2.4 Interest rate and risk rating are the most important factors for lendersIn crowdfunding, the motivation of funders varies significantly, depending on the natureof the crowdfunding model. In many cases non–financial motivation is the main driverof an individual’s decision to fund a project or business. This can be due to a number offactors, for example the project may be delivering a social benefit that the funder wishesto support, the project may be developing a product that is of interest or the entrepreneurthemselves may be in some way connected to the funder. In their study on investors incrowdfunded projects Ordanini et al., (2011)29conclude that there are three main factorsthat can be seen as the motivating factors for investors:• A feeling of being at least partly responsible for the success of others’ initiatives (desirefor patronage).• Striving to be part of a communal social initiative (desire for social participation).• Seeking a payoff from monetary contributions (desire for investment).Van Wingerden and Ryan (2011)30suggest that individuals engage in the activityof crowdfunding for intrinsic reasons, mimicking a relationship also existing in theneighbouring fields of crowdsourcing. While in many cases, non–financial motives is themain driver behind people’s decision to invest or donate money, where peer–to–peerlending differs from crowdfunding, the results show that financial return is the mainmotivation behind individuals’ decision to lend money to companies (Figure 10).Figure 10: How important are the following factors in your decision to lend money on Funding Circle?100%90%80%70%60%50%40%30%10%20%0%InterestrateofferedSecurityRiskratinggivenbyFCBusinessmodelGreatproduct/serviceManagementteamThecompanyispopularwithotherlendersUnimportantOf little importanceImportant NeutralVery important
  • 23. 23 BANKING ON EACH OTHER: Peer–to–peer lending to business: Evidence from Funding CircleInterest rate offered was the stronger motivation for the survey respondents. Figure 10illustrates the results of the survey responses to the question on ‘how different factorsinfluence the decision to lend money’. Ninety–five per cent of all surveyed lendersresponded that the interest rate is important or very important. This finding reconfirms thatpeer–to–peer lenders are mainly interested in financial returns made.The second most important factor for lenders, was the security offered by the company(88 per cent). Not surprisingly, lenders want to feel that their money is secure. This is alsoreflected by the importance of the risk rating which is given by the Funding Circle, which isranked third by the survey respondents (80 per cent).Characteristics associated with the product or service offered by the company, its businessmodel and the management team are important to only half of the surveyed lenders. Thisis obviously linked to the large volume of small transactions associated with the peer–to–peer lending model, as lenders look to attain significant levels of diversification across aportfolio of loan parts.One may argue that the decision of lenders to invest may be influenced by the popularityof the firm with other investors. In the case of peer–to–peer lending however, it appearsthat the popularity of the company amongst other lenders is important or very importantto only one–quarter of the surveyed lenders. Potential lenders are generally not influencedby the popularity of the company with other lenders except indirectly where the biddingprocess drives down the interest on popular loans.Figure 11: How important are the following factors in your decision to lend money to a particular company?100%90%80%70%60%50%40%30%10%20%0%FinancialtrackrecordCustomerandmarketpotentialPersonalexpertiseintheindustrythatthecompanyoperatesRegioninwhichthecompanyisbasedPersonalknowledgeofthecompanyFamilyrelationshiporfriendshipwithamemberofthecompanyUnimportantOf little importanceImportant NeutralVery important
  • 24. 24 BANKING ON EACH OTHER: Peer–to–peer lending to business: Evidence from Funding CircleFigure 11 shows that 81 per cent of survey respondents consider the financial track recordof the company as an important or very important factor. Similarly to the previous figure,customer and market potential is not of great importance to half of the survey responders.Iyer et al., 2009 suggests that the peer–to–peer markets may have participants who areskilled at judging particular aspects of the borrower that banks are unable to gauge, forexample, a lender who works in the sector where the borrower proposes an entrepreneurialbusiness idea may better assess the viability of the proposal. In the business angels31community, personal expertise in the industry the company operates is of great importantto business angels. However, as Figure 11 shows, only 21 per cent of surveyed peer–to–peerlenders consider personal expertise as an important factor in their decision to lend moneyto a company. Other factors such as ‘region in which the company is based’, ‘personalknowledge of the company’ and ‘family relationship’ are by and large irrelevant to the vastmajority of the surveyed lenders.
  • 25. 25 BANKING ON EACH OTHER: Peer–to–peer lending to business: Evidence from Funding Circle3 Borrowers tend to be established businesses, exporters and seeking finance for working capital or expansionThis section of the report examines the characteristics of companies that borrowed moneythrough the Funding Circle marketplace or are preparing to do so. Eighty–nine companiestook part in the survey, all of whom are members of Funding Circle and 57 of whom havealready received a loan.Table 4: Characteristics of the companiesTable 4 shows that borrowers are established businesses with an average age of 11 yearsand a median of eight. Surveyed companies’ turnover on average is in addition suchcompanies with £906,000 with a median of £400,000. The companies have raised anaverage of £222,235 of external finance in their lifetime (£50,000 the median value).Surveyed companies that received a loan through Funding Circle, employed on average11 people at the time of applying for the loan, significantly more than the average of threefor the entire SME population.32At the time of the survey, such companies employed onaverage 13 people, an average increase in employment of 27 per cent since receivingfinance.Variable Obs Mean Median Min MaxYear of company 78 2001 2004 1970 2011incorporationHow many members of 55 11 6 0 100staff did you employat the time of applyingfor the loan?How many members of 55 13 8 0 150staff do you employ now? Increase employment (actual) 57 1.93 1 –4 50Growth in of employment 53 27 14 –50 300increase (%)What is your company’s 69 905,557 400,000 300 10mturnover (last available)? (£)How much external finance 82 222,345 50,000 0 5000000have you raised in thelifetime of the firm? (£)
  • 26. 26 BANKING ON EACH OTHER: Peer–to–peer lending to business: Evidence from Funding CircleFigure 12: Businesses’ export activityAs Figure 12 indicates 42 per cent of the companies surveyed export their products andservices. This is considerably greater than the proportion of the overall SME populationthat export, just 23 per cent.33Figure 13: The main reason(s) for raising external capitalFigure 13 shows that 36 per cent of companies raised external capital for expansionpurposes and a similar proportion of them (35 per cent) for working capital. Around one–fifth of them raised the capital for asset purchases while just 8 per cent for R&D–relatedexpenses.YesNo42%58%Does your business exportits product or service?Working capitalExpansionAsset purchaseR&D8%35%36%21%
  • 27. 27 BANKING ON EACH OTHER: Peer–to–peer lending to business: Evidence from Funding CircleBusinesses came from a wide range of sectors with ‘Professional and BusinessSupport’ featuring the most, followed by ‘Manufacturing and Engineering’, and ‘IT andTelecommunications’.Figure 14: Companies’ regional distributionNorthWestEnglandNorthernIrelandScotlandSouthWestEnglandWalesWestMidlandsYorkshireand theHumberEastMidlandsEast ofEnglandLondonSouth EastEnglandNorthEastEnglandless than 10%Percentage of sample10 - 20%more than 20%A large proportion of the borrowers are also concentrated in London (28 per cent) and theSouth East (12 per cent). This broadly reflects the location spread of the general businesspopulation in the UK, as cumulatively, London and the South East are home to 34 per centof all UK businesses.34
  • 28. 28 BANKING ON EACH OTHER: Peer–to–peer lending to business: Evidence from Funding Circle3.1 Borrowers receive funds from a large number of lendersCompanies in the sample borrowed on average £35,000. However, there is a lot of variationacross amounts raised, with the minimum amount being £5,000 and the maximum£75,000. Over 50 per cent of the companies raised less than £30,000. The companies inthe sample borrowed less than the average for all businesses on Funding Circle which isabout £50,000.Table 5: Business loan characteristicsFigure 15: Average amount of loans raised40%30%20%10%0%100000800000 600004000020000What is the amount that you raised through Funding Circle in total (£)?PercentageVariable Obs Mean Min MaxLoan amount received (£) 57 35,078 5000 75000Number of lenders 56 418 72 872Monthly payment (£) 57 1295.81 189.1 4372.96Interest rate (%) 56 8.02 6.53 10Max interest accepted (%) 57 8.49 6.7 10.6Min interest accepted (%) 57 5.50 4 8.8Loan term (months) 57 32.63 12 36
  • 29. 29 BANKING ON EACH OTHER: Peer–to–peer lending to business: Evidence from Funding CircleThe average number of people that lent money to each company is 418. As Figure 16indicates, the majority of companies raised money from 200–600 peopleFigure 16: Number of lenders to each company25%20%15%10%5%0%8000 600400200PercentageInterest rateThe average interest rate charged to the sampled companies was 8.02 per cent.35This isslightly lower than the overall average interest rate on the site (which currently stands at8.7 per cent, excluding fees).36The minimum interest accepted was 4 per cent and themaximum 10.6 per cent. Funding Circle’s main competitors are high street banks which canoffer similar interest rates to companies.37Risks and defaults rateAs explained earlier, all businesses are credit checked before being allowed on to FundingCircle’s marketplace and each loan is assigned a credit risk band based on the businesses’credit score. Following are the risk bands for the surveyed sample of businesses. Thesebroadly correspond to the population of business loans that have been financed throughFunding Circle. All information on the performance of Funding Circles’ loan book isavailable on their website.
  • 30. 30 BANKING ON EACH OTHER: Peer–to–peer lending to business: Evidence from Funding Circle30%21%32%17%12%31%33%24%Loans originated – Study sample Loans originated – FC total to dateA+ (Very low risk) A (Low risk) B (Below average risk) C (Average risk)Funding Circle risk ratingFigure 17: Companies’ risk ratingHalf of the companies in our sample are rated as A+ (very low risk) or A (low risk) andonly 17 per cent of the surveyed sample received C (average risk). The sample slightly overrepresents low–risk businesses compared to the Funding Circle population.Figure 18: Number of loans by risk rating1600140012002000180010008006004002000LoansoriginatedLoansoutstandingOntimeA+ (Very low risk) A (Low risk) B (Below average risk) C (Average risk)Funding Circle risk rating
  • 31. 31 BANKING ON EACH OTHER: Peer–to–peer lending to business: Evidence from Funding CircleFigure 18 provides some statistics for all loans facilitated by the Funding Circlemarketplace; 1,79338loans have been originated so far and 95 per cent of them areoutstanding (Funding Circle started operation in 2010 and as a result most loans are notyet matured). Forty–three per cent of originated loans were made to companies with low(A) or very low (A+) risk.Based on the data provided by Funding Circle (accessible to all registered members),a small proportion of loans are late (1.8 per cent of loans are late for a period less than30 days and 1.2 per cent for a period more than 30 days). Only 2.3 per cent of loans aredescribed as bad debt while 0.7 per cent as recoveries.39It is worth noting that looking atthe actual values of the loans (instead of the number of loans) these percentages are lower.Figure 19: Loan repayment and failure rate120100806040200FullyrepaidloansLate<30daysLate>=30daysLate>=90daysRecoveriesBaddebtA+ (Very low risk) A (Low risk) B (Below average risk) C (Average risk)Funding Circle risk ratingThe existence of defaults does highlight the necessity for having a diversified portfolio ofloans and why such high levels of diversification are seen for some lenders (an average of67 loans). Funding Circle calculates that all lenders who have lent to at least 100 businesseswith a maxium exposure of 1 per cent per loan have experienced positive returns (as ofMarch 2013). To assist lenders calculate the level of diversification they need, FundingCircle provides estimates for the percentage of lifetime ‘bad debt’ for businesses in eachrisk category (Table 9).
  • 32. 32 BANKING ON EACH OTHER: Peer–to–peer lending to business: Evidence from Funding CircleTable 6: Bad debt by risk ratingProportion that had attained more than one loanProportion providing personal guaranteeProportion that had raised money from family and friendsProportion that had received external finance from another web–based providerProportion that attempted to secure a bank loan prior to approaching Funding CircleProportion of debt raised in the financial year 2010–2011 this amount represents11%89%31%3%60%70%Table 7: Companies’ borrowing activityExternal finance raised through the Funding Circle represented 70 per cent of all debtraised by the companies in the sample during 2010–2011. As expected’ the majority ofbusinesses had originated just a single loan through the Funding Circle thus far.% A+ (Very A (Low risk) B (Below C (Average Total low risk) average risk) risk)Current bad debt % 0.5% 1.6% 2.2% 0.9% 1.4%Estimated lifetime 1.1% 2.7% 4.1% 5.8% 3.6%bad debt %
  • 33. 33 BANKING ON EACH OTHER: Peer–to–peer lending to business: Evidence from Funding Circle3.2 Borrowers valued the speed at which funding was deliveredand do not plan to return to banks for funding in the futureSixty per cent of the companies in the sample attempted to secure a bank loan beforeapproaching Funding Circle (Table 7). Those companies were asked to identify the reasonsfor the bank applications not being completed.Figure 20: Reasons for the bank application not being completed*Respondents could select more than one optionThirty per cent of those companies thought that the process took too long. Twenty–six percent lacked the required collateral, while 22 per cent said attaining bank finance was tooexpensive. Eight per cent of them were rejected because they reached their upper lendinglimited and only 4 per cent were rejected due to poor credit history. Individual responsesfrom companies included: “bank not interested”, “amount too small”, “the bank failed togive any understandable reason”, “bank would not give a decision”, “what was available wasnot enough to cover what we needed”, “ banks do not like my industry”, “the whole processwas complicated”.Others who had not attempted to secure finance from a bank prior to approachingFunding Circle gave their reasons for not doing so.35%30%25%20%15%10%5%0%ProcesstakestoolongLackofcollateralTooexpensiveReachedtheupperlendinglimitPoorcredithistoryPercentage
  • 34. 34 BANKING ON EACH OTHER: Peer–to–peer lending to business: Evidence from Funding CircleFigure 21: Reasons for not attempting to secure a loan from a bank* Respondents could select more than one optionForty per cent of companies in the sample did not attempt to secure a loan from thebanking sector. Thirty–eight per cent of them did not apply for a bank loan because theybelieved that the process takes too long, 22 per cent found bank loans too expensive, 19per cent did not like the hidden fees and a similar proportion thought that they wouldnot be successful. Other responses included: “do not like the bank’s changing attitudeto lending”, “prefer not to expose all activity to my bank”, “personal guarantee would berequired but not offered”, “liked the Funding Circle concept”, “unhelpful bank”, “I haveaccess to bank finance; this is additional back–up”.40%35%30%25%20%15%10%5%0%ProcesstakestoolongTooexpensiveHiddenfeesIdidntthinkIwouldbesuccessfulPercentage
  • 35. 35 BANKING ON EACH OTHER: Peer–to–peer lending to business: Evidence from Funding CircleFigure 22: Benefits and drawbacks of borrowing through Funding Circle* Respondents could select more than one optionSurveyed companies were asked to identify the main benefits of borrowing money throughFunding Circle. Figure 22 illustrates that the two most popular responses were ‘speedof securing finance’ (58 per cent) which is consistent with the earlier finding that someborrowers found that banks processes takes too long, and that Funding Circle was ‘not mybank’ (54 per cent).‘Dealing with multiple lenders’ is the most commonly identified drawback of sourcingcapital from Funding Circle (with 18 per cent) followed by the ‘making financial detailspublic for Funding Circle members’ (17 per cent). Other responses include: “personalguarantee”, “not much really, the interest rate is probably higher than I could have securedthrough my bank but the FC process is considerably more straightforward”, “length ofrepayment term”.Not my bankPlatform ease of useSpeed of securing finance7060200 10 4030 50CostMaking financial detailspublic for FC membersDealing with questions from lendersDealing with multiple lenders that you do nothave an ongoing relationship withWhat do you think is the main drawbackof borrowing through Funding Circle?What do you think is the main benefitof bortowing through Funding Circle?OtherInterest ratesClarity of termsOther58%54%36%34%29%6%18%17%15%14%13%
  • 36. 36 BANKING ON EACH OTHER: Peer–to–peer lending to business: Evidence from Funding CircleFigure 23: What were the results of securing finance for your business?* Respondents could select more than one optionNot surprisingly, for 74 per cent of the surveyed companies the secured loan resulted in‘improved cashflow’. The purchase of equipment and increases in employment was alsothe result of the secured loan for 33 per cent of the surveyed companies. Other responsesinclude: “gave our growth a boost”, “increased sales”, “conducted valuable research”,“ability to expend and open two new outlets”, “commercial confidence “, “secured largerpremises”, “completed new product development”, “invested in new projects”, “funded anoverseas business mission”.80%70%60%50%40%30%20%10%0%IncreasedemploymentImprovedcashflowIncreasedoverseasgrowthPurchasedequipmentOtherPercentage
  • 37. 37 BANKING ON EACH OTHER: Peer–to–peer lending to business: Evidence from Funding CircleFigure 24: Future borrowing behaviourThirty–two per cent of surveyed companies responded that without Funding Circle it islikely or very likely that they wouldn’t have received the finance they needed while 37 percent of them did not know. Interestingly, 77 per cent of the surveyed companies are likelyor very likely to approach Funding Circle first in the future, if further external finance isneeded. Even if banks offer a similar facility, only 27 per cent of the surveyed companiessaid they would approach them first in the future.100%70%80%90%60%50%40%30%20%10%0%How likely are youto approachFunding Circle firstin the future iffurther externalfinance is needed?How likely are youto approach banksfirst in the future iffurther externalfinance is needed?If you approachbanks first in thefuture and areunsuccessful, howlikely are you tothen approachFunding Circle?How likely are youto approach banksbefore you approachFunding Circle ifbanks offer a similaronline facility?Very likely Likely Unlikely Very unlikely Dont knowHowlikely is thatwithout FundingCircle you wouldnthave receivedexternal finance?
  • 38. 38 BANKING ON EACH OTHER: Peer–to–peer lending to business: Evidence from Funding Circle4 ConclusionOverall, the study revealed specific characteristics of both peer–to–peer lenders andborrowers. Lenders tend to be educated, wealthy individuals and unlike participants inother forms of crowdsourced finance, their decision to lend money through Funding Circleis mainly driven by the potential for financial gains.Businesses receiving finance through the Funding Circle are established SMEs, many ofwhom are exporters and are in need of capital to either expand or to fund their operations.The primary reason for approaching Funding Circle over banks seems to be frustration withthe drawn–out loan application processes of the latter rather than their inability to accesscredit from them.It is still too early to say whether peer–to–peer lending to businesses will be sustainableover time (for example the default rates are still a projection). However, there are severalfactors that indicate it has the potential to be an important source of funding for UKbusinesses. First, 77 per cent of the surveyed companies are likely or very likely toapproach Funding Circle first in the future if further external finance is needed and themajority of these would approach Funding Circle before approaching their bank. Even ifbanks offer a similar facility to Funding Circle, only 27 per cent of the surveyed companiessaid they would approach banks first.From the lenders’ perspective as long as the return (after fees) remains healthy comparedto alternatives, such as bank savings rates and investment returns people will keep lending.Over 75 per cent of lenders stated their willingness to increase the amount of money thatthey lend through the Funding Circle in the next 12 months. Rough estimates suggest thatup to £12.3 billion could be potentially lent to UK SMEs through peer–to–peer platformsper annum. It is not clear yet whether the model is more successful in particular industrysegments than others.Although peer–to–peer business lending has facilitated loans in the UK worth around £120million so far,40this is still a very small amount relative to the money lent every year by thebanking sector. It is unlikely, particularly in the short or medium term that such platformswould grow to the point of being seen as significant competitors to high street banks.However, such models can be seen as complementary to the existing sources of funds andan important part of the financial architecture in the UK.
  • 39. 39 BANKING ON EACH OTHER: Peer–to–peer lending to business: Evidence from Funding Circle5 Appendix5.1 MethodologyFunding Circle included the survey invitation to its monthly newsletter on June 2012. Theseindividuals and companies have voluntarily registered on the Funding Circle marketplace.The questionnaire was also sent out via personalised emails to members. In addition to thesurvey results, Funding Circle provided financial information for companies that took partin the survey. This data was then matched with the survey responses from the companies. Itis important to note that it was not possible to match (at the loan level) the responses fromthe lenders with those from the borrowers. This is mainly due the fact that lenders lent toseveral companies and the survey responses from both lenders and lenders are based ontheir overall activity and not on individual loans. The survey does not capture data at theloan level but at the lenders’ and borrowers’ aggregated level. Therefore it is not possibleto perform analysis based on individual loans as the unit of analysis (for example, how likelyit is that Funding Circle loans provide lenders with supernormal profits which would haverequired information on the maturity of each loan, when they were issued, the coupon,and whether they’ve defaulted). Finally, aggregated data on loan characteristics have beenprovided by Funding Circle (accessible to all registered members).5.2 Examining the drivers of the amount lent by individualsTo understand what may affect the size of the amount that individuals lend to companies, amultivariate regression analysis has been performed. The dependent variable is simply theamount of money invested by each individual.
  • 40. 40 BANKING ON EACH OTHER: Peer–to–peer lending to business: Evidence from Funding CircleTable 8: Investment practices analysis82.63*** 75.20*** 78.31*** 78.61*** 78.57*** 77.69*** 77.19*** 76.68*** 79.20*** 73.84*** 73.82***(6.936) (6.778) (7.042) (7.143) (7.037) (7.032) (7.028) (7.190) (7.528) (7.780) (7.798)2,521*** 2,326*** 2,234*** 2,329*** 2,395*** 2,428*** 2,611*** 2,649*** 2,782*** 2,815*** 2,780***(350.4) (351.8) (368.1) (382.6) (380.8) (384.0) (397.5) (403.5) (409.9) (408.9) (415.7) 0.0853*** 0.0812*** 0.0820*** 0.0917*** 0.0841*** 0.0847*** 0.0835*** 0.0927*** 0.0889*** 0.0896*** (0.0280) (0.0289) (0.0291) (0.0286) (0.0287) (0.0287) (0.0289) (0.0291) (0.0290) (0.0291) 139.1 27.25 –3.847 –2.645 –30.57 –27.75 –28.57 –17.50 –12.54 (258.2) (285.4) (296.4) (296.3) (297.8) (302.4) (305.7) (304.7) (306.3) –287.3 –354.6 –352.6 –303.9 –316.2 –339.5 –298.7 –294.7 (288.2) (285.2) (284.6) (285.4) (289.4) (294.1) (293.6) (294.4) –2,171 –3,109* –3,098* –3,065* –3,453** –3,324** –3,441** (1,604) (1,642) (1,649) (1,670) (1,692) (1,689) (1,709) 5,805** 5,926** 5,886** 5,672** 5,766** 5,758** (2,366) (2,364) (2,381) (2,391) (2,383) (2,388) –3,833* –3,980* –4,056* –3,694* –3,652* (2,078) (2,115) (2,153) (2,150) (2,169) –433.4 –239.9 215.4 373.9 (1,359) (1,408) (1,419) (1,455) 683.7 –179.1 –228.2 (1,435) (1,480) (1,486) 4,839** 4,774** (1,898) (1,907) 871.9 (1,697)–25,133*** –23,093*** –22,688*** –22,063*** –21,982*** –22,488*** –21,261*** –21,225*** –22,856*** –24,114*** –24,019***(3,867) (3,850) (3,975) (4,157) (4,141) (4,165) (4,215) (4,303) (4,457) (4,468) (4,504)481 460 445 435 427 424 423 418 406 403 4020.326 0.331 0.337 0.336 0.356 0.366 0.371 0.372 0.388 0.398 0.398TotalamountlentTotalamountlentTotalamountlentTotalamountlentTotalamountlentTotalamountlentTotalamountlentTotalamountlentTotalamountlentTotalamountlentTotalamountlentNumber ofcompanies youhave lent moneyto through FCTotal assetsinvested (log) inalternative assetsAmount lent tocompaniesoutside FCYears of experienceworking in SMEsYears of experienceworking in largecompaniesExperience inaccessing externalcapital (binary)Business angel(binary)Investments inBonds and Shares(binary)Autobid (binary)Loans bought fromthe secondarymarket (binary)Loans sold on thesecondary market(binary)Use the Q&Afacilities (binary)ConstantObservationsR–squaredStandard errorsin parentheses*** p<0.01, **p<0.05, * p<0.1Table 8 Column (1) shows regression coefficients for the total amount of money lentthrough Funding Circle to the total number of loans made by each individual and thenatural log of assets invested to other assets. Both coefficients are positive and significantat a 1 per cent level. Controlling for the number of companies lent to means that all othercoefficients can be interpreted regarding the impact they have on the amount lent percompany, rather than the amount lent overall. Column (2) presents the same regressorsbut this time controlling for amounts lent to companies outside Funding Circle. The resultsremain positive and significant suggesting a strong and expected relationship betweenpersonal wealth and loan size to companies through Funding Circle.
  • 41. 41 BANKING ON EACH OTHER: Peer–to–peer lending to business: Evidence from Funding CircleWhen controlling for professional experience, Column (3) and (4), such coefficients donot significantly change. Column (6) shows a negative and significant coefficient for thevariable ‘experience in assessing external capital’ (once controlling for whether lenders arebusiness angels) and a positive and significant coefficient for the variable business angel,suggesting that people with experience in accessing external capital make smaller loanscompared to those with no such experience. Lenders that are also business angels aremore likely to make bigger loans than those that are not.There is also some evidence to suggest that people with investments in bonds and sharesare likely to make bigger loans to companies compared with those without (Column 7).Column (8) suggests that lenders that used the secondary market to sell their loans havemade bigger loans to companies compared with those that did not use it. The same doesnot apply to lenders that use the secondary market to buy loans. This provides someevidence to the argument that some lenders agree to lend money at a competitive interestrate and then sell this loan in the secondary market at a higher interest rate in order tobenefit from the difference in the interest.
  • 42. 42 BANKING ON EACH OTHER: Peer–to–peer lending to business: Evidence from Funding CircleEndnotes1. It is important to note that none of the loans have reached their maturity yet so consequently, the estimated rate of returnentails a number of assumptions. Any conclusion drawn from our study is subject to the validity of these assumptions.2. BIS (2012) ‘Boosting finance option for business.’ London: Department for Business, Innovaiton and Skills. Available at: http://www.bis.gov.uk/assets/biscore/enterprise/docs/b/12-668-boosting-finance-options-for-business.pdf3. Xavier Rolet: “Bank lending is not the right tool for financing SMEs.” Available at: http://marketinvoice.com/2011/11/15/xavier-rolet-ceo-london-stock-exchange-explains-why-bank-lending-not-most-effective-method-financing-smes/4. ‘The Economist.’ (2012) Business lending, Plumbing problems. Available at: http://www.economist.com/news/britain/21569412-flow-credit-british-business-continues-dry-up-latest-policies-may-yet-open5. Slovik et al., (2011) estimate Basel 3 will lead to higher bank margins, as banks pass on the rise in funding costs due to the highercapital requirements. Slovik, P. and Cournède, B. (2011) ‘Macroeconomic Impact of Basel III.’ OECD Economics DepartmentWorking Papers, No. 844,OECD Publishing. Available at: http://dx.doi.org/10.1787/5kghwnhkkjs8-en 6. Barclays, Lloyds Banking Group, The Royal Bank of Scotland and HSBC.7. HM Treasury: National Loan Guarantee Scheme. See: http://www.hm-treasury.gov.uk/d/national_loan_guarantee_scheme.pdf8. BIS: New business bank to support up to £10 billion of business lending, September 2012. See: http://news.bis.gov.uk/Press-Releases/New-business-bank-to-support-up-to-10-billion-of-business-lending-6808d.aspx9. The Business Finance Partnership (BFP) aims to increase the supply of capital through non-bank lending channels and, in thelonger term, to help to diversify the sources of finance available to businesses. It will co-invest a total of £1.2 billion throughthese channels, matched by at least equal private sector capital, to help create and support new sources of lending for small andmid-sized businesses in the UK.10. Another recipient of money from the Business Finance Partnership scheme is peer-to-peer lender Zopa. Zopa, which wasestablished in 2005, was the first peer-to-peer lender in the UK and up to now, it has been focusing on personal lending. Todate Zopa has facilitated over £270 million worth of loans.11. The model of sourcing finance by getting small amounts from many funders rather than a lot from one or a few is century’s oldbut has experienced rapid growth in recent years due to its ease of facilitation online.12. Collins, L. and Y. Pierrakis (2012) ‘The Venture Crowd: Crowdfunding equity investment into business.’ London: Nesta. Availableat: http://www.nesta.org.uk/library/documents/TheVentureCrowd.pdf Baeck, P., Collins, L. and Westlake, S. (2012) ‘CrowdingIn: How the UK’s businesses, charities, government and financial system can make the most of crowdfunding.’ London: Nesta.Available at: http://www.nesta.org.uk/library/documents/CrowdingInwebv3.pdf13. Wikipedia, see: http://en.wikipedia.org/wiki/Peer-to-peer_lending, accessed 12/12/2012.14. See: http://uk.zopa.com/15. See: http://www.lendingclub.com/16. See: http://www.prosper.com/17. For example see Iyer, R., Khwaja, A., Luttmer, E. and Shue, K. (2009) ‘Screening in New Credit Markets: Can Individual LendersInfer Borrower Creditworthiness in Peer-to-Peer Lending?’ NBER Working Paper 15242, Aug 2009. Cambridge MA: NBER.Available at: http://www.nber.org/papers/w1524218. For example: http://www.crowdcube.com/investment/ineed-limited-1226519. For example: http://www.solarschools.org.uk/barnesprimary/20. For example: http://www.kickstarter.com/projects/1744629938/dreadball-the-futuristic-sports-game?ref=card21. For example: http://myprojects.cancerresearchuk.org/22. Agrawal, A.K., Catalini, C. and Goldfarb, A. (2011) ‘The Geography of Crowdfunding.’ Cambridge MA: National Bureau ofEconomic Research. Available at: http://www.nber.org/papers/w1682023. Wiltbank, R. (2009) ‘Siding with the Angels - Business Angel Investing: Promising Outcomes and Effective Strategies.’ London:NESTA. Available at: http://www.nesta.org.uk/publications/reports/assets/features/siding_with_the_angels24. See: https://www.fundingcircle.com/investors/how-investing-works/autobid-tool25. Wiltbank, R. (2009) ‘Siding with the Angels - Business Angel Investing: Promising Outcomes and Effective Strategies.’ London:NESTA. Available at: http://www.nesta.org.uk/publications/reports/assets/features/siding_with_the_angels26. Ibid.27. Does not include pension, property or physical assets.28. It is important to note that this will not necessarily be new lending as the money lent through P2P platforms could haveotherwise been lent to businesses through banks.29. Ordanini, A., Miceli, L., Pizzetti, M. and Parasuraman, A. (2011) Crowdfunding: Transforming customers into investors throughinnovative service platforms. ‘Journal of Service Management.’ Vol. 22, no. 4, pp.443–470, 2011. Available at: http://www.scribd.com/doc/59656556/Crowdfunding-Transforming-Customers-into-Investors-through-Innovative-Service-Platforms30. Van Wingerden, R. and Ryan, J. (2011) ‘Fighting for funds: An exploratory study into the field of crowdfunding.’ Lund: LundUniversity. Available at: http://lup.lub.lu.se/luur/download?func=downloadFile&recordOId=1982630&fileOId=243619331. Wiltbank, R. (2009) ‘Siding with the Angels - Business Angel Investing: Promising Outcomes and Effective Strategies.’ London:NESTA. Available at: http://www.nesta.org.uk/publications/reports/assets/features/siding_with_the_angels32. Calculated from figures presented by Federation of Small Businesses. Available at: http://www.fsb.org.uk/stats33. BIS (2012) ‘UK trade performance across markets and sectors.’ BIS Economics Papers No 17. London: Department for Business,Innovation and Skills. Available at: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/32475/12-579-uk-trade-performance-markets-and-sectors.pdf34. ONS data for 2011.35. It is important to note that none of the loans have reached their maturity and that this rate does not account for bad debts orfees.36. Funding Circle website accessed on 08/04/201337. For example, Santander offers rates from 7.9 per cent p.a. to 12.9 per cent p.a. for business loans from £1,000 to £25,000 over aterm of 12 to 60 months. See: https://www.santander.co.uk Accessed on 09/04/2013.38. As of 10/04/2013.39. Recoveries include the portion of defaulted loans where the payments outstanding have been recovered (despite the businessgoing into default).40. Approximately £100 million from Funding Circle and £20 million from ThinCats.
  • 43. Nesta1 Plough PlaceLondon EC4A 1DEresearch@nesta.org.ukwww.twitter.com/nesta_ukwww.facebook.com/nesta.ukwww.nesta.org.ukApril 2013Nesta Operating Company. English charity no. 7706036.Scottish charity no. SC042833.

×